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Daily Deal Sites: Win Win?

By Shaya Silber

There has been a noticeable surge of  “daily-deal” sites, such as Groupon, over the last year or so.  These sites, and the business model that they employ are relatively new. As a result, many people are grappling with the implications of operating and using these types of websites. Some of the consequences are positive, while others are less so. This article will address some of the issues from the perspective of someone looking to set up such a website.

Merchant’s Failing to Honour the Voucher

The most common problem arising with daily deal sites is merchants who do not honour the vouchers. It is rare for a merchant to completely disregard the voucher. In most cases, the merchant adds terms to the voucher that were not present at the time of the voucher’s sale. For example, if a customer visits the merchant’s establishment on a Sunday, the merchant may suddenly say that the voucher is not valid on weekends. This often leads to customers demanding a refund from the website who sold them the voucher.

Refunds

When a merchant does not honour the vouchers, it is obviously frustrating for customers. The customers then typically contact the website and demand a refund.  This can be tremendously harmful to a daily deal website’s reputation. Furthermore, if the daily deal website has already paid the merchant their share of the voucher’s proceeds, the daily deal site has to chase the merchant down for the losses – something that is not always practical.

Payment Structure

When drafting the agreement between the daily deal site and the merchant, it is important to outline an appropriate payment structure with the merchant. On the one hand, if the daily deal site pays all of the collected fees to the merchant up front, the daily deal site runs the risk of having to issue refunds out of its own pocket. On the other hand, the daily deal site holds onto the proceeds for too long, the merchant may not be able to maintain enough stock to honour the coupons, thereby magnifying the problem the daily deal site sought to avoid (this is especially common in industries with perishable items such as grocery stores or restaurants).

Overextended Merchants

It is not uncommon for a single merchant to run several deals on multiple websites. The appeal of daily deal sites is stronger for smaller businesses because of the local marketing opportunity that it provides. However, if a smaller business runs several deals with several websites, it puts a significant burden on the establishment to honour a large number of vouchers. If the merchant is a larger business, this is less likely to be a problem since they’ll be able to handle large spikes in traffic and the associated cash flow issues. Some smaller businesses run additional deals simply to generate some quick cash up front in order to fill orders from previous deals. This can start to resemble something like a ponzi scheme.

When dealing with smaller businesses it is important to do a bit of due diligence prior to signing an agreement. In some instances, websites will do a background and/or a credit check of the merchant prior to signing an agreement with them.

Websites also often require the insertion of an exclusivity clause into the agreement. The clause outlines certain restrictions on the merchant with regards to running a deal with another website. However, when inserting exclusivity clauses, it is important that they are not overly restrictive. If found to be overly restrictive, a judge may strike down the entire contract (not just the restrictive elements).

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